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The Target Squeeze: Chain Battles Foes From Above and Below

NEW YORK — Unfortunately for Target Corp., discretion is not the greatest part of value.With Wal-Mart Stores carrying the day on price and...

NEW YORK — Unfortunately for Target Corp., discretion is not the greatest part of value.

With Wal-Mart Stores carrying the day on price and value on one side, and Kohl’s Corp. and J.C. Penney Co. providing more upscale price and brand pressure on the other, Target came through what has been roundly described as one of the rockiest holiday seasons in memory far from unscathed. Comparable-store sales dipped 5.7 percent at its discount stores in November and managed only a 1 percent rise in December, below the 3 to 5 percent uptick initially expected by the firm. At one point during the month, Target singled out men’s and women’s apparel as among its weakest product categories.

Hardly robust, Wal-Mart Stores, Target’s archrival and the industry’s most dangerous competitor, eked out discount-store comp increases of 3.3 percent in December and 2.8 percent in November.

Through their ability to differentiate, popularly priced quasi-luxury and designer names have accounted for much of Target’s success. Target’s designer apparel offerings include Mossimo, Cherokee, Stephen Sprouse and, more recently, Liz Lange with a maternity collection. Designer-cum-talk-show-host Isaac Mizrahi is also set to come out with a line. Additionally, Todd Oldham, Philippe Starck and Michael Graves lend their names to the firm’s home offerings, joining other labels such as Eddie Bauer and Woolrich. There is also a new collection of home products called Swell from Cynthia Rowley.

In that strength, though, may also lie a weakness.

The head winds facing the firm are growing as Target’s own success has placed it squarely in the crosshairs of the competition. In the months and years to come, Target will be under increasing pressure from Wall Street to sustain its growth, a harder task now since its numbers have grown from really, really big to enormous. Accordingly, missteps in merchandising, the likelihood of which increase as the firm strives to be differentiated and its competitors attempt to keep pace, could hurt more in the future than they have in the past.

Wal-Mart’s move to greater fashion content, as evidenced by its growing George apparel program, could also blunt Target’s recent fashion edge.
This squeeze may force Target to inject more fashion risk as the "chic" discounter continues its expansion.

Some of the blame for tepid holiday sales can be placed on tough comparisons with last year, when comps rose 13.5 percent in November and 1.8 percent in December. Analysts have also suggested that the firm simply planned too aggressively and failed to effectively communicate the shortfall’s reasons to Wall Street. More blame can be piled on an uncooperative shopping environment.

Salomon Smith Barney analyst Deborah Weinswig pointed to product mix as an important factor in Target’s sales relative to other retailers. Forty-three percent of sales at Wal-Mart are consumables, or items sold at supermarkets, she said, as opposed to just 20 percent at Target.

"They’re having a traffic problem because you’re not going to go there for consumables because you know you’re going to pay less at Wal-Mart." Likewise, she said, "if you want inexpensive apparel, you’ll go to Penney’s or Kohl’s." Penney’s and Kohl’s comped up 4.7 and 3.3 percent, respectively, in December.

She added, however, that Target’s gross margins benefit from an extensive private label program that produces a high percentage of its own apparel. Industry estimates place Target’s private label penetration at around 75 to 80 percent of its total.

"Whether by choice or by force, they are heading more and more toward being a designer discount store," said Weinswig. "They’re making a huge push for labels that are only carried at Target. The story here is their growing dependence on exclusive designers and the risk could be a fashion miss."

J.P. Morgan Chase & Co. analyst Shari Schwartzman Eberts noted: "Target drives traffic into the stores through its differentiation. In an environment where the consumer is not looking for the next hot item, they’re always going to suffer."

Target’s designer focus does make it more vulnerable to fashion hits and misses, noted Eberts, although the analyst doesn’t see the firm changing its strategy or losing its way. "It seems as if their niche is shrinking a bit, making it harder for them to differentiate themselves and maybe that’s why they’ve been intensifying their designer focus."
She added: "As the pricing disparity between Target, Kohl’s and Penney’s has narrowed, Target has become a little bit less clearly positioned in the mind of consumers."

Wal-Mart has also packed more fashion into its apparel assortment to accompany its low-cost punch. In addition to the firm’s efforts to bring the successful British-born George label to the U.S., the discounter will roll out the new Levi Strauss & Co.’s Signature line of jeans in about 3,000 Wal-Mart stores in time for back-to-school.

The firm’s apparel offering is big business.

Sales of Cherokee-branded apparel in Target stores, for the nine months ended Nov. 2, rose 7.7 percent to $1.4 billion, from $1.3 billion a year earlier.

At the end of its first contract year on January 31, 2002, Target sold $811 million worth of Mossimo goods, according to the licensor. For the nine months ended Sept. 30, sales were up about 11 percent. Assuming that rate continued, despite the disappointing holiday season, Target would rake in around $900 million in sales of the Mossimo brand in the current fiscal year.

Estimates put Target’s overall apparel sales in 2001 around $8.85 billion, second only to Wal-Mart’s $14.96 billion.

A common criticism is that many of Target’s designer names lack the megawatt star power necessary to resonate with customers.

Retail Forward vice president Sandra Skrovan noted that, to some extent, the positioning of the firm’s designer offerings is confusing to shoppers. "There are a lot of names that they’ve been introducing into their stores without, it seems, the big marketing ‘umph’ behind them."

Still, Target is more Target than Mossimo. Instead of focusing just on brands, the firm employs a two-tiered branding approach with the store and designers, said Skrovan. "Consumers don’t shop Target for the brands. They shop Target for the Target brand, basically. If they go to Target, they’re going to probably find something that’s within their price range and a value and quality balance that they’re looking for."

It’s a formula Skrovan, along with others, lauded as successful. "Target can basically coexist with Wal-Mart in the marketplace," she noted.
One reason for this is the two discount giants’ distinctly different customer base. Target, on its Web site, said its customers have a median age of 44 and a household income of about $54,000. The firm’s skewing toward increasingly upscale customers, as well — last year, Target reported its customers had an average household income of about $51,000.

Wal-Mart does not provide such data, but presumably, as the low-cost leader, has a less-affluent customer base. Wal-Mart also covers much more of the country with 1,566 namesake stores and 1,244 Supercenters versus Target’s 1,148 discount doors, 94 of which are SuperTarget stores.

Target’s customer base overlaps more with Kohl’s than Wal-Mart, said Skrovan. Kohl’s operates 457 stores and plans for about 80 more this year. There are differences, though, with Target’s customers tending to be younger than those who shop at Kohl’s, she said. "Whether or not that’s a good thing or not for Target remains to be seen."

The firm, by repositioning its Cherokee offerings as well as the Merona label in 2002, has been trying to extend its reach beyond its younger base and into baby-boomer terrain, said Skrovan.

While Target’s hip image has helped it win some customer loyalty, it still faces the never-ending battle of keeping those customers coming through its doors.

C. Britt Beemer, founder and chairman of America’s Research Group, the Charleston, S.C.-based consumer marketing consultancy, noted that the firm has been hurt by moves to rein in the expense associated with returns.

"A year-ago Christmas, they enforced a more strict return policy that in fact negatively impacted about 5.5 percent of their own shoppers." That 5.5 percent, Beemer said, were some of the firm’s better customers and might have represented 7 or 8 percent of the firm’s sales dollars.

"All year, they just never got many of them back," he noted. "About 4 percent are still upset with them, but if you look at a company like Target that’s dependent on getting their own customers to come back, that’s a huge loss. It just takes too much effort these days to earn the customer’s attention, respect and loyalty. Target’s being impacted by trying to be more concerned about Wall Street than they are about Main Street."
Be that as it may, Wall Street is watching the firm’s top line.

Davenport & Co. analyst David Campbell said Target’s sales would pick up when consumer spending rises. Just when that will be, though, remains a question. "Anyone with expectations for the near term might be disappointed," said the analyst, who pointed to Target’s relatively strong comparisons for the first half of the year.

"Sales are definitely a challenge, there’s no doubt about it, and theirs is a niche that is under attack," said Campbell, who doesn’t expect Target to bite off more fashion risk than it can chew. "It’s difficult to know how much risk there is. They have always seemed to manage that well, using more sourcing internally and working closely with their designers."

For the week ended Jan. 18, Target, on a recorded call, said comps in its discount stores were "slightly" below its plans for a 1 to 3 percent uptick in January, although up to that point, the month was still on plan. Men’s apparel, again, was cited among the weakest product categories.

Chairman and chief executive officer Bob Ulrich, in a statement accompanying December’s comps, noted: "For the fourth quarter, we expect the impact of this sales shortfall on earnings to be at least partially offset by continued strength in our gross margin rate performance and substantial growth in contribution from our credit card operations."

While the firm’s credit card business has grown in importance, especially since the rollout of its branded Visa card, it’s also caused some concern among analysts. Last year, the business accounted for 10.9 percent, or about $154.3 million, of Target’s profits, before unusual items, and should be more this year. Although that’s a sizable and important piece of the pie, some see the business as a distraction to management, even though others see its executives effectively juggling its concerns. However, the credit card business yields lower returns than Target’s core operations and, among investors, will pressure its price-earnings multiple due to the lower valuation of credit card companies.

The firm’s SuperTargets have also been criticized as a lower-return business due to their deeper focus on food. As reported, Target hopes to have 2,010 stores — about 400 of which are slated to be SuperTargets — by the year 2010.
On the plus side for the firm is the weakening of Kmart Corp. while in bankruptcy. Over the past year, the shrinking discounter — whose survival remains anything but assured — has closed, or announced its intention to close, 609 weaker stores and eliminate 59,000 positions. While the liquidations have unleashed a flood of goods into the market at bargain prices, the reduced door count on the part of Kmart leaves more market share in the mass sector up for grabs for Target and Wal-Mart.